JPMorgan Touts Nakheel Saying Default Doubtful: Islamic Finance

By Dana El Baltaji -
Jul 8, 2013

JPMorgan Chase & Co. is advising
clients to buy Nakheel PJSC’s Islamic bonds after last month’s
record slump as new projects boost the Dubai developer’s
earnings, while government backing makes a default improbable.

State-run Nakheel’s 4.27 billion dirhams ($1.2 billion) of
sukuk yielded 9.88 percent at 12:30 p.m. in Dubai, down seven
basis points this month, after surging 179 basis points in June.
That’s more than twice the average gain in yields on corporate
Islamic debt tracked by HSBC/Nasdaq Dubai indexes. JPMorgan
listed Nakheel in a July 4 research note as its “top overweight
recommendation” among Dubai real-estate debt.

Nakheel will manage to pay or refinance as much as half of
the $3 billion of debt due in 2016 as it generates at least $1
billion from new projects and land sales, JPMorgan said.
Investors have demanded higher yields to hold Nakheel’s bonds
since the company drove Dubai to the brink of default in 2009,
prompting the government to extend a bailout.

“The government is quite unlikely to let Nakheel default
on its bond obligations in 2016 after supporting the company
under much more difficult circumstances,” JPMorgan analyst
Zafar Nazim wrote in the note. “Nakheel has been a beneficiary
of real-estate recovery in Dubai. We believe that new project
launches and plot sales were not baked in the original
restructuring plan that was agreed in 2010.”

Home Prices

Nakheel, known for building an island shaped like the frond
of a palm tree and another like a world map off Dubai’s coast,
has received at least $8 billion of cash from the government
since announcing a standstill agreement with creditors in 2009,
JPMorgan said.

The real estate industry in Dubai, one of seven sheikhdoms
of the United Arab Emirates, has started recovering from a crash
that sent prices plunging more than 65 percent. New projects
such as the world’s biggest Ferris wheel, a new district with
100 hotels and the world’s largest mall were unveiled in the
past year.

Sale prices for residential units have risen 28 percent
from a trough in January 2011, according to an index tracked by
Jones Lang LaSalle. Dubai’s economy grew 4.4 percent in 2012,
the fastest pace in five years. Against this backdrop, JPMorgan
also recommends Islamic debt of Emaar Properties PJSC (EMAAR), developer
of the world’s tallest tower, and Jebel Ali Free Zone Authority
FZE, which leases commercial real estate in Dubai.

“Dubai was able to avert bond default in all of its
government-related entities and its economy has recovered to
pre-crisis levels,” JPMorgan said. “Nakheel has been a
beneficiary of real-estate recovery in Dubai.”

Dubai’s credit risk returned this year to levels it hasn’t
seen since late 2008 amid the global credit crisis, after state-linked companies paid or refinanced at least $3.75 billion since
the start of 2012. Five-year credit default swaps, which protect
investors against non-payment of debt, dropped 130 basis points
in the past year to 220 on July 5, according to CMA. Middle East
contracts fell 13 basis points, on average, to 302 in the
period.

‘Risky Sector’

Still, property prices in Dubai are likely to ease “due to
high levels of future supply, limited debt availability and more
mature market regulations,” Alan Robertson, chief executive
officer for the Middle East and North Africa at Jones Lang
LaSalle, said by e-mail yesterday.

“Dubai’s real estate is still considered a risky sector,”
said Montasser Khelifi, Dubai-based senior manager for global
markets at Quantum Investment Bank Ltd. “When there’s turmoil
in the bond market, investors sell the debt, even though new
projects in Dubai are announced regularly these days.”

Nakheel’s business prospects are improving. The company
said in May it sold 471 villas valued at almost 1.9 billion
dirhams. The developer also expects to sign an agreement with
banks to extend the maturity by eight years from 2015 on 8
billion dirhams of debt, a spokeswoman said last month.

Investing in Nakheel’s sukuk may be a risk worth taking,
Khelifi said. “While its very possible Nakheel won’t have the
money to repay the bonds, it’s good news that they’re seeking to
refinance their debt,” he said.